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Solutions Manual, Chapter 2 41

Chapter 2 Systems Design: Job-Order Costing

Solutions to Questions

2-1 By definition, overhead costs cannot be practically traced to products or jobs. Therefore, overhead costs must be allocated rather than traced if they are to be assigned to products or jobs.

2-2 Job-order costing is used in situations where many different products or services are produced each period. Each product (or job) is different from all others and requires separate costing. Process costing is used where a single, homogeneous product, such as cement, bricks, or gasoline, is continuously produced for long periods.

2-3 The job cost sheet is used to record all costs that are assigned to a particular job. These costs include direct materials and direct labor costs traced to the job and manufacturing over-head cost applied to the job. When a job is completed, the job cost sheet is used to com-pute the unit product cost. The job cost sheet is also a control document for determining (1) how many units have been sold and the cost of these units and (2) how many units are still in inven-tory at the end of a period and the cost of these units on the balance sheet.

2-4 A predetermined overhead rate is used to apply overhead to jobs. It is determined be-fore the period begins and is computed by di-viding the estimated total manufacturing over-head for the period by the estimated total amount in the allocation base. Thereafter, over-head is applied to jobs by multiplying the pre-determined overhead rate by the actual amount of the allocation base that is incurred for each job. The most common allocation base is direct labor-hours.

2-5 A sales order is issued after an agree-ment has been reached with a customer con-

cerning quantities, prices, and shipment dates for goods. This sales order is the basis for the production department to issue a production order. The production order specifies what should be produced and is the basis for the ac-counting department’s preparation of a job cost sheet. The job cost sheet, in turn, is used to summarize the various production costs incurred in completing the job. These costs are entered on the job cost sheet from materials requisition forms and direct labor time tickets and applying overhead using the predetermined overhead rate.

2-6 Many production costs, such as factory rent, cannot be traced to a particular product or job. Such costs must be allocated to products. Examples of such costs would include utilities, maintenance on machines, and depreciation of the factory building. These costs are indirect production costs, as explained in Chapter 1.

2-7 Actual manufacturing overhead costs are not known until after a period is over. Thus, unit product costs would not be known until af-ter the period is over. Moreover, if actual manufacturing overhead costs are assigned to products, unit product costs will fluctuate due to changes in the activity level, spreading fixed costs over more or fewer units, and to seasonal factors.

2-8 Whatever drives changes in the over-head cost should be used as the allocation base; that is, the allocation base should cause the overhead cost. If the allocation base does not really cause the overhead, costs will be incor-rectly attributed to products and jobs and their costs will be distorted.

2-9 Assigning overhead costs to jobs does not ensure a profit. The units produced may not



42 Introduction to Managerial Accounting, 4th Edition

be sold and if they are sold, they may not in fact be sold at prices sufficient to cover all costs. It is a myth that assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered only by selling products to cus-tomers at a profitable price—not by allocating costs.

2-10 The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process. Generally, the amount of overhead applied will not be the same as the amount of actual cost incurred, since the predetermined overhead rate, which is used in applying over-head, is based on estimates.

2-11 Underapplied overhead occurs when the actual overhead cost exceeds the amount of overhead cost applied to Work in Process in-ventory during the period. Overapplied overhead occurs when the actual overhead cost is less than the amount of overhead cost applied to Work in Process inventory during the period. The simplest way to dispose of the underapplied or overapplied overhead is to close it out to Cost of Goods Sold. The adjustment for underapplied overhead increases Cost of Goods Sold whereas the adjustment for overapplied overhead de-creases Cost of Goods Sold.

2-12 Overhead may be underapplied for a number of reasons. Poor control over overhead

spending can result in actual overhead costs exceeding estimated overhead costs. Also, if some of the overhead is fixed and actual amount of the allocation base for the period is less than estimated at the beginning of the pe-riod, overhead will be underapplied.

2-13 Underapplied overhead is added to cost of goods sold since underapplied overhead im-plies that not enough overhead was assigned to jobs during the period and therefore cost of goods sold is understated. Likewise, overapplied overhead is deducted from cost of goods sold.

2-14 A plantwide overhead rate is a single overhead rate used throughout all production departments. Some companies use a different overhead rate in each production department rather than a single plantwide rate. In situations where the cost driver for overhead cost differs from one department to another, the allocation base should also be different. Hence, multiple overhead rates can result in more accurate product costs.

2-15 When direct labor is replaced by auto-mated equipment, overhead increases and direct labor decreases. If the predetermined overhead rate is based on direct labor, this results in an increase in the predetermined overhead rate.




Brief Exercise 2-1 (15 minutes)

a. Job-order costing

b. Job-order costing

c. Process costing

d. Job-order costing

e. Process costing*

f. Process costing*

g. Job-order costing

h. Job-order costing

i. Job-order costing

j. Job-order costing

k. Process costing

l. Process costing * Some of the listed companies might use either a process costing or a

job-order costing system, depending on the nature of their operations and how homogeneous the final product is. For example, a plywood manufacturer might use job-order costing if it has a number of different plywood products that are constructed of different woods or come in markedly different sizes.





1. The direct materials and direct labor costs listed in the exercise would have been recorded on four different documents: the materials requisition form for Job ES34, the time ticket for Harry Kerst, the time ticket for Mary Rosas, and the job cost sheet for Job ES34.

2. The costs for Job ES34 would have been recorded as follows: Materials requisition form: Quantity Unit Cost Total Cost Blanks 40 $8.00 $320 Nibs 960 $0.60 576 $896 Time ticket for Harry Kerst

Started Ended Time

Completed Rate Amount Job

Number 9:00 AM 12:15 PM 3.25 $12.00 $39.00 ES34

Time ticket for Mary Rosas

Started Ended Time

Completed Rate Amount Job

Number 2:15 PM 4:30 PM 2.25 $14.00 $31.50 ES34

Job Cost Sheet for Job ES34 Direct materials ... $896.00 Direct labor: Harry Kerst ....... 39.00 Mary Rosas ...... 31.50 $966.50





The predetermined overhead rate is computed as follows: Estimated total manufacturing overhead ....... $586,000 ÷ Estimated total direct labor-hours (DLHs) .. 40,000 DLHs = Predetermined overhead rate .................... $14.65 per DLH





a. Raw Materials .............................. 86,000 Accounts Payable ................... 86,000

b. Work in Process ........................... 72,000 Manufacturing Overhead ............... 12,000 Raw Materials ........................ 84,000

c. Work in Process ........................... 105,000 Manufacturing Overhead ............... 3,000 Wages Payable ...................... 108,000 d. Manufacturing Overhead ............... 197,000 Various Accounts ................... 197,000





Actual direct labor-hours .......................... 12,600 × Predetermined overhead rate ................ $23.10 = Manufacturing overhead applied ........... $291,060





1. Cost of Goods Manufactured Direct materials: Raw materials inventory, beginning ................. $24,000 Add: Purchases of raw materials ...................... 53,000 Total raw materials available ........................... 77,000 Deduct: Raw materials, ending ........................ 6,000 Raw materials used in production .................... 71,000 Less indirect materials included in

manufacturing overhead ............................... 8,000 $ 63,000 Direct labor ....................................................... 62,000 Manufacturing overhead applied to work in

process inventory ........................................... 41,000 Total manufacturing costs.................................. 166,000 Add: Beginning work in process inventory .......... 41,000 207,000 Deduct: Ending work in process inventory .......... 38,000 Cost of goods manufactured .............................. $169,000

2. Cost of Goods Sold Finished goods inventory, beginning ................. $ 86,000 Add: Cost of goods manufactured .................... 169,000 Goods available for sale ................................... 255,000 Deduct: Finished goods inventory, ending......... 93,000 Unadjusted cost of goods sold ......................... 162,000 Add: Underapplied overhead ............................ 8,000 Adjusted cost of goods sold ............................. $170,000





Parts 1 and 2.

Cash Raw Materials

(a) 75,000 (a) 75,000 (b) 73,000

(c) 152,000

(d) 126,000

Work in Process Finished Goods

(b) 67,000 (f) 379,000

(c) 134,000 379,000 (f) 379,000

(e) 178,000

379,000 (f) 379,000

Manufacturing Overhead Cost of Goods Sold

(b) 6,000 (e) 178,000 (f) 379,000 (g) 28,000

(c) 18,000 351,000

(d) 126,000

(g) 28,000 28,000





1. Actual direct labor-hours ......................... 8,250 × Predetermined overhead rate ............... $21.40 = Manufacturing overhead applied ........... $176,550 Less: Manufacturing overhead incurred .... 172,500 $ 4,050

Manufacturing overhead overapplied ........ $4,050

2. Because manufacturing overhead is overapplied, the cost of goods sold

would decrease by $4,050 and the gross margin would increase by $4,050.




Exercise 2-9 (30 minutes)

1. a. Raw Materials Inventory ........................... 210,000 Accounts Payable .................................. 210,000

b. Work in Process ....................................... 152,000 Manufacturing Overhead .......................... 38,000 Raw Materials Inventory ........................ 190,000

c. Work in Process ....................................... 49,000 Manufacturing Overhead .......................... 21,000 Salaries and Wages Payable ................... 70,000

d. Manufacturing Overhead .......................... 105,000 Accumulated Depreciation ...................... 105,000

e. Manufacturing Overhead .......................... 130,000 Accounts Payable .................................. 130,000

f. Work in Process ....................................... 300,000 Manufacturing Overhead ........................ 300,000 75,000 machine-hours × $4 per machine-hour = $300,000.

g. Finished Goods ........................................ 510,000 Work in Process ..................................... 510,000

h. Cost of Goods Sold ................................... 450,000 Finished Goods ...................................... 450,000 Accounts Receivable ................................. 675,000 Sales .................................................... 675,000 $450,000 × 1.5 = $675,000

2. Manufacturing Overhead Work in Process

(b) 38,000 (f) 300,000 Bal. 35,000 (g) 510,000

(c) 21,000 (b) 152,000

(d) 105,000 (c) 49,000

(e) 130,000 (f) 300,000

6,000 Bal. 26,000

(Overapplied overhead)





1. a. Raw Materials .............................. 315,000 Accounts Payable .................... 315,000

b. Work in Process ........................... 216,000 Manufacturing Overhead .............. 54,000 Raw Materials ......................... 270,000

c. Work in Process ........................... 80,000 Manufacturing Overhead .............. 110,000 Wages and Salaries Payable .... 190,000

d. Manufacturing Overhead .............. 63,000 Accumulated Depreciation ....... 63,000

e. Manufacturing Overhead .............. 85,000 Accounts Payable .................... 85,000

f. Work in Process ........................... 300,000 Manufacturing Overhead ......... 300,000

Estimated total manufacturing overhead costPredetermined=overhead rate Estimated total amount of the allocation base

$4,320,000= =$7.50 per machine-hour

576,000 machine-hours

40,000 MHs × $7.50 per MH = $300,000.

2. Manufacturing Overhead Work in Process

(b) 54,000 (f) 300,000 (b) 216,000

(c) 110,000 (c) 80,000

(d) 63,000 (f) 300,000

(e) 85,000




Exercise 2-10 (continued)

3. The cost of the completed job would be $596,000 as shown in the Work in Process T-account above. The entry for item (g) would be:

Finished Goods ................................ 596,000 Work in Process ......................... 596,000

4. The unit product cost on the job cost sheet would be: $596,000 ÷ 8,000 units = $74.50 per unit.





1. Since $320,000 of studio overhead cost was applied to Work in Process on the basis of $200,000 of direct staff costs, the apparent predetermined overhead rate was 160%:

Studio overhead applied $320,000=

Total amount of the allocation base $200,000 direct staff costs

=160% of direct staff costs

2. The Krimmer Corporation Headquarters project is the only job remaining

in Work in Process at the end of the month; therefore, the entire $40,000 balance in the Work in Process account at that point must apply to it. Recognizing that the predetermined overhead rate is 160% of direct staff costs, the following computation can be made:

Total cost added to the Krimmer Corporation Headquarters project ..... $40,000

Less: Direct staff costs ..................... $13,500 Studio overhead cost ($13,500 × 160%) ................ 21,600 35,100 Costs of subcontracted work ............... $ 4,900

With this information, we can now complete the job cost sheet for the Krimmer Corporation Headquarters project:

Costs of subcontracted work ........... $ 4,900 Direct staff costs ............................ 13,500 Studio overhead ............................. 21,600 Total cost to January 31 ................. $40,000





1. As suggested, the costing problem does indeed lie with manufacturing overhead cost. Because manufacturing overhead is mostly fixed, the cost per unit increases as the level of production decreases. The problem can be “solved” by using a predetermined overhead rate, which should be based on expected activity for the entire year. Many students will use units of product in computing the predetermined overhead rate, as follows:


$840,000=

200,000 units

=$4.20 per unit.

The predetermined overhead rate could also be set on the basis of

direct labor cost or direct materials cost. The computations are:


$840,000=

$240,000 direct labor cost

=350% of direct labor cost.


$840,000=

$600,000 direct materials cost

=140% of direct materials cost.




Exercise 2-12 (continued)

2. Using a predetermined overhead rate, the unit costs would be:

Quarter

First Second Third Fourth Direct materials .................. $240,000 $120,000 $ 60,000 $180,000 Direct labor ........................ 96,000 48,000 24,000 72,000 Manufacturing overhead:

Applied at $4.20 per unit, 350% of direct labor cost, or 140% of direct materials cost ......... 336,000 168,000 84,000 252,000

Total cost .......................... $672,000 $336,000 $168,000 $504,000 Number of units produced .. 80,000 40,000 20,000 60,000 Estimated unit product

cost ................................ $8.40 $8.40 $8.40 $8.40





1. Item (a): Actual manufacturing overhead costs for the year. Item (b): Overhead cost applied to work in process for the year. Item ©: Cost of goods manufactured for the year. Item (d): Cost of goods sold for the year.

2. Manufacturing Overhead ............................. 30,000 Cost of Goods Sold ................................ 30,000





1. Predetermined overhead rates:

Company A:


$432,000= =$7.20 per DLH

60,000 DLHs

Company B:


$270,000= =$3.00 per MH

90,000 MHs

Company C:


$384,000= =160% of direct materials cost


2. Actual overhead costs incurred ........................... $420,000 Overhead cost applied to Work in Process: 58,000* actual DLHs × $7.20 per DLH ............. 417,600 Underapplied overhead cost ............................... $ 2,400

*7,000 DLHs + 30,000 DLHs + 21,000 DLHs = 58,000 DLHs





1. Actual manufacturing overhead costs .............. $ 48,000

Manufacturing overhead applied:

10,000 MH × $5 per MH .............................. 50,000 Overapplied overhead cost .............................. $ 2,000 2. Direct materials: Raw materials inventory, beginning .............. $ 8,000 Add purchases of raw materials .................... 32,000 Raw materials available for use .................... 40,000 Deduct raw materials inventory, ending ........ 7,000 Raw materials used in production ................. $ 33,000 Direct labor .................................................... 40,000

Manufacturing overhead cost applied to work

in process ................................................... 50,000 Total manufacturing cost ................................ 123,000 Add: Work in process, beginning ..................... 6,000 129,000 Deduct: Work in process, ending ..................... 7,500 Cost of goods manufactured ........................... $121,500




Problem 2-16A (45 minutes)

1. Alpha Beta Gamma Designer-hours ............................. 30 55 15 Predetermined overhead rate ......... ×$74 ×$74 ×$74 Overhead applied .......................... $2,220 $4,070 $1,110 2. Alpha Beta Direct materials cost ..... $ 3,300 $ 5,400 Direct labor cost ........... 5,100 7,000 Overhead applied ......... 2,220 4,070 Total cost .................... $10,620 $16,470

Completed Projects ............................. 27,090* Work in Process ............................. 27,090*

* $10,620 + $16,470 = $27,090 3. The balance in the Work in Process account consists entirely of the costs

associated with the Gamma project:

Direct materials cost ............... $ 600 Direct labor cost ..................... 1,500 Overhead applied ................... 1,110 Total cost in work in process ... $3,210

4. The balance in the Overhead account is determined as follows:

Overhead Actual overhead costs 7,900 Applied overhead costs 7,400 Underapplied overhead 500

As indicated above, the debit balance in the Overhead account is called underapplied overhead.





1. Cutting Department:


$260,000= =$4.00 per machine-hour


Finishing Department:


$705,600=


=120% of direct labor cost

2.

Overhead Applied

Cutting Department: 110 MHs × $4.00 per MH .. $440 Finishing Department: $450 × 120% ................. 540 Total overhead cost applied .............................. $980

3. Yes; if some jobs required a large amount of machine time and little

labor cost, they would be charged substantially less overhead cost if a plantwide rate based on direct labor cost were being used. It appears, for example, that this would be true of Job AF-45 which required considerable machine time to complete, but required only a small amount of labor cost.





1. a. Raw Materials ......................................... 400,000 Cash ................................................. 400,000

b. Work in Process ...................................... 350,000 Manufacturing Overhead ......................... 79,000 Raw Materials .................................... 429,000

c. Work in Process ...................................... 375,000 Manufacturing Overhead ......................... 110,000 Sales Commissions Expense .................... 95,000 Salaries Expense ..................................... 80,000 Salaries and Wages Payable ............... 660,000

d. Manufacturing Overhead ......................... 35,000 Rent Expense ......................................... 17,000 Cash ................................................. 52,000

e. Manufacturing Overhead ......................... 98,000 Accounts Payable ............................... 98,000

f. Advertising Expense ................................ 150,000 Accounts Payable ............................... 150,000

g. Manufacturing Overhead ......................... 183,000 Depreciation Expense .............................. 20,000 Accumulated Depreciation .................. 203,000

h. Work in Process ...................................... 487,500 Manufacturing Overhead .................... 487,500

Estimated manufacturing overhead cost $481,000

= = 130% of direct labor cost.Estimated direct labor cost $370,000

$375,000 actual direct labor cost × 130% = $487,500.




Problem 2-18A (continued)

i. Finished Goods ...................................... 1,230,000 Work in Process ................................ 1,230,000

j. Accounts Receivable ............................... 1,850,000 Sales ................................................ 1,850,000

Cost of Goods Sold ................................. 1,250,000 Finished Goods ................................. 1,250,000 2.

Raw Materials Work in Process Bal. 35,000 (b) 429,000 Bal. 25,000 (i) 1,230,000 (a) 400,000 (b) 350,000 Bal. 6,000 © 375,000 (h) 487,500 Bal. 7,500

Finished Goods Manufacturing Overhead

Bal. 65,000 (j) 1,250,000 (b) 79,000 (h) 487,500 (i) 1,230,000 © 110,000 Bal. 45,000 (d) 35,000 (e) 98,000 (g) 183,000 Bal. 17,500

Cost of Goods Sold

(j) 1,250,000

3. Manufacturing overhead is underapplied by $17,500 for the year. The

entry to close this balance to Cost of Goods Sold would be:

Cost of Goods Sold ............................................ 17,500 Manufacturing Overhead ............................... 17,500





4. Productos Elina S.A. Income Statement

Sales ....................................................... $1,850,000 Cost of goods sold ($1,250,000 + $17,500) 1,267,500 Gross margin ............................................ 582,500 Selling and administrative expenses:

Sales commissions ................................. $ 95,000 Administrative salaries ............................ 80,000 Rent expense ......................................... 17,000 Advertising expense ............................... 150,000 Depreciation expense ............................. 20,000 362,000

Net operating income ............................... $ 220,500





1. Estimated total manufacturing overhead costPredetermined=overhead rate Estimated total amount of the allocation base

$248,000= =$4.00 per machine-hour


2. The amount of overhead cost applied to Work in Process for the year would be: 56,000 machine-hours × $4.00 per machine-hour = $224,000. This amount is shown in entry (a) below:

Manufacturing Overhead

(Maintenance) 21,500 (a) 224,000 (Indirect materials) 15,000 (Indirect labor) 76,000 (Utilities) 45,000 (Insurance) 12,000 (Depreciation) 68,000 Balance 13,500 Work in Process

(Direct materials) 650,000 (Direct labor) 67,000 (Overhead) (a) 224,000

3. Overhead is underapplied by $13,500 for the year, as shown in the

Manufacturing Overhead account above. The entry to close out this balance to Cost of Goods Sold would be:

Cost of Goods Sold ............................. 13,500 Manufacturing Overhead ................ 13,500





4. When overhead is applied using a predetermined rate based on machine-hours, it is assumed that overhead cost is proportional to machine-hours. When the actual level of activity turns out to be 56,000 machine-hours, the costing system assumes that the overhead will be 56,000 machine-hours × $4.00 per machine-hour, or $224,000. This is a drop of $24,000 from the initial estimated total manufacturing overhead cost of $248,000. However, the actual total manufacturing overhead did not drop by this much. The actual total manufacturing overhead was $237,500—a drop of only $10,500 from the estimate. The manufacturing overhead did not decline by the full $24,000 because of the existence of fixed costs and/or because overhead spending was not under control. These issues will be covered in more detail in later chapters.





1. a. Raw Materials ............................. 273,000 Accounts Payable ................... 273,000 b. Work in Process .......................... 240,000 Manufacturing Overhead.............. 80,000 Raw Materials ........................ 320,000 c. Work in Process .......................... 370,000 Manufacturing Overhead.............. 100,000 Salaries Expense ......................... 85,000 Salaries and Wages Payable ... 555,000 d. Manufacturing Overhead.............. 107,000 Accounts Payable ................... 107,000 e. Advertising Expense .................... 168,000 Accounts Payable ................... 168,000 f. Manufacturing Overhead.............. 40,850 Insurance Expense ...................... 2,150 Prepaid Insurance .................. 43,000 g. Manufacturing Overhead.............. 224,000 Depreciation Expense .................. 56,000 Accumulated Depreciation ...... 280,000 h. Work in Process .......................... 555,000 Manufacturing Overhead ........ 555,000

$370,000 actual direct labor cost × 150% = $555,000 overhead applied.

i. Finished Goods ........................... 1,170,000 Work in Process ..................... 1,170,000 j. Accounts Receivable ................... 1,560,000 Sales .................................... 1,560,000 Cost of Goods Sold ..................... 1,190,000 Finished Goods ...................... 1,190,000





2. Raw Materials Finished Goods

Bal. 53,000 (b) 320,000 Bal. 81,000 (j) 1,190,000 (a) 273,000 (i) 1,170,000

Bal. 6,000 Bal. 61,000 Work in Process Manufacturing Overhead

Bal. 33,400 (i) 1,170,000 (b) 80,000 (h) 555,000 (b) 240,000 (c) 100,000 (c) 370,000 (d) 107,000 (h) 555,000 (f) 40,850

Bal. 28,400 (g) 224,000

Bal. 3,150 Cost of Goods Sold

(j) 1,190,000 3. Manufacturing overhead is overapplied by $3,150. The journal entry to

close this balance to Cost of Goods Sold is:

Manufacturing Overhead .......... 3,150 Cost of Goods Sold ............. 3,150 4. Basin Products

Income Statement For the Year Ended December 31

Sales .............................................................. $1,560,000 Cost of goods sold ($1,190,000 – $3,150) ......... 1,186,850 Gross margin ................................................... 373,150 Selling and administrative expenses: Salaries expense ........................................... $ 85,000 Advertising expense ...................................... 168,000 Insurance expense ........................................ 2,150 Depreciation expense .................................... 56,000 311,150 Net operating income ...................................... $ 62,000





1. a. Estimated total manufacturing overhead costPredetermined=overhead rate Estimated total amount of the allocation base

$360,000=


=125% of direct materials cost

b. Before the under- or overapplied overhead can be computed, we

must determine the amount of direct materials used in production for the year.

Raw materials inventory, beginning ................ $ 4,000 Add, Purchases of raw materials ..................... 450,000 Raw materials available.................................. 454,000 Deduct: Raw materials inventory, ending ........ 39,000 Raw materials used in production ................... $415,000

Since no indirect materials are identified in the problem, these would all be direct materials. With this figure, we can proceed as follows:

Actual manufacturing overhead costs: Indirect labor ............................................. $145,000 Property taxes ............................................ 10,000 Depreciation of equipment .......................... 190,000 Maintenance ............................................... 60,000 Insurance, factory ...................................... 4,250 Rent, building ............................................. 94,000 Total actual costs .......................................... 503,250

Applied manufacturing overhead costs:

$415,000 × 125% ...................................... 518,750 Overapplied Overhead ................................... $ (15,500)





2. Timeless Products

Schedule of Cost of Goods Manufactured

Direct materials: Raw materials inventory, beginning ......... $ 4,000 Add purchases of raw materials .............. 450,000 Total raw materials available .................. 454,000 Deduct raw materials inventory, ending .. 39,000

Raw materials used in production .............. $ 415,000 Direct labor .............................................. 65,000 Manufacturing overhead applied to work in

process ................................................. 518,750 Total manufacturing costs ......................... 998,750 Add: Work in process, beginning ............... 100,000 1,098,750 Deduct: Work in process, ending ............... 45,000 Cost of goods manufactured ..................... $1,053,750

3. Cost of goods sold: Finished goods inventory, beginning ............. $ 300,000 Add: Cost of goods manufactured ................. 1,053,750 Goods available for sale ............................... 1,353,750 Deduct: Finished goods inventory, ending ..... 280,000 Cost of goods sold ....................................... $1,073,750 4. Direct materials .............................................. $ 4,000 Direct labor .................................................... 1,500 Overhead applied ($4,000 × 125%) ................ 5,000 Total manufacturing cost ................................ $10,500

$10,500 × 112% = $11,760 price to the customer.





5. The amount of overhead cost in Work in Process was:

$18,000 direct materials cost × 125% = $22,500.

The amount of direct labor cost in Work in Process was:

Total ending work in process ............ $45,000 Deduct: Direct materials ................. $18,000 Manufacturing overhead ..... 22,500 40,500 Direct labor cost .............................. $ 4,500

The completed schedule of costs in Work in Process was:

Direct materials ................... $18,000 Direct labor ......................... 4,500 Manufacturing overhead ...... 22,500 Work in process inventory .... $45,000





1. The cost of raw materials put into production was:

Raw materials inventory, 1/1 ....................... $ 50,000 Debits (purchases of materials) ................... 350,000 Materials available for use ........................... 400,000 Raw materials inventory, 12/31 ................... 40,000 Materials requisitioned for production .......... $360,000

2. Of the $360,000 in materials requisitioned for production, $310,000 was

debited to Work in Process as direct materials. Therefore, the difference of $50,000 ($360,000 − $310,000) would have been debited to Manufacturing Overhead as indirect materials.

3. Total factory wages accrued during the year

(credits to the Factory Wages Payable account) ... $520,000 Less direct labor cost (from Work in Process) ......... 500,000 Indirect labor cost ................................................ $ 20,000 4. The cost of goods manufactured for the year was $1,600,000—the

credits to the Work in Process account. 5. The Cost of Goods Sold for the year was:

Finished goods inventory, 1/1 ........... $ 100,000 Add: Cost of goods manufactured

(from Work in Process) .................. 1,600,000 Goods available for sale .................... 1,700,000 Finished goods inventory, 12/31 ........ 200,000 Cost of goods sold ............................ $1,500,000

6. The predetermined overhead rate was:

Manufacturing overhead cost applied $750,000 150% of direct= = labor cost.Direct labor cost $500,000





7. Manufacturing overhead was underapplied by $15,000, computed as follows:

Actual manufacturing overhead cost for the year (debits) ............................................................. $765,000

Applied manufacturing overhead cost (from Work in Process—this would be the credits to the Manufacturing Overhead account) ...................... 750,000

Underapplied overhead ......................................... $ 15,000 8. The ending balance in Work in Process is $60,000. Direct materials

make up $10,000 of this balance, and manufacturing overhead makes up $30,000. The computations are:

Balance, Work in Process, 12/31 ................................. $60,000 Less: Direct labor cost (given) ..................................... 20,000

Manufacturing overhead cost ($20,000 × 150%) . 30,000 Direct materials cost (remainder) ................................ $10,000





1. Molding Department predetermined overhead rate:


$324,000= =$5.40 per MH

60,000 MHs

Painting Department predetermined overhead rate:


$952,000=


=160% of direct labor cost

2. Molding Department overhead applied: 250 machine-hours × $5.40 per machine-hour .... $1,350 Painting Department overhead applied: $1,840 direct labor cost × 160% ........................ 2,944 Total overhead cost .............................................. $4,294 3. Total cost of Job 435:

Department Molding Painting Total Direct materials ......................... $ 700 $ 105 $ 805 Direct labor ............................... 150 1,840 1,990 Manufacturing overhead applied . 1,350 2,944 4,294 Total cost .................................. $2,200 $4,889 $7,089

Unit product cost for Job 435: $7,089

Average cost per unit = = $236.30 per unit30 units





4. Department Molding Painting Manufacturing overhead incurred ........... $320,000 $970,000 Manufacturing overhead cost applied:

62,000 machine-hours × $5.40 per

machine-hour .................................. 334,800 $602,000 direct labor cost × 160% ...... 963,200 Underapplied (or overapplied) overhead . $(14,800) $ 6,800




Ethics Challenge (60 minutes)

1. Shaving 5% off the estimated direct labor-hours in the predetermined overhead rate will result in an artificially high overhead rate, which is likely to result in overapplied overhead for the year. The cumulative effect of overapplying the overhead throughout the year is all recognized in December when the balance in the Manufacturing Overhead account is closed out to Cost of Goods Sold. If the balance were closed out every month or every quarter, this effect would be dissipated over the course of the year.

2. This question may generate lively debate. Where should Cristin

Madsen’s loyalties lie? Is she working for the general manager of the division or for the corporate controller? Is there anything wrong with the “Christmas bonus”? How far should Cristin go in bucking her boss on a new job?

While individuals can certainly disagree about what Cristin should do, some of the facts are indisputable. First, the practice of understating direct labor-hours results in artificially inflating the overhead rate. This has the effect of inflating the cost of goods sold figures in all months prior to December and overstating the costs of inventories. In December, the adjustment for overapplied overhead provides a big boost to net operating income. Therefore, the practice results in distortions in the pattern of net operating income over the year. In addition, since all of the adjustment is taken to Cost of Goods Sold, inventories are still overstated at year-end. This means that retained earnings is also overstated.

While Cristin is in an extremely difficult position, her responsibilities under the IMA’s Statement of Ethical Professional Practice seem to be clear. The Credibility standard states that management accountants have a responsibility to “disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations.” Cristin should discuss this situation with her immediate supervisor in the controller’s office at corporate headquarters. This step may bring her into direct conflict with the general manager of the division, so it would be a very difficult decision for her to make.




Ethics Challenge (continued)

In the actual situation that this case is based on, the corporate controller’s staff were aware of the general manager’s accounting tricks, but top management of the company supported the general manager because “he comes through with the results” and could be relied on to hit the annual profit targets for his division. Personally, we would be very uncomfortable supporting a manager who will resort to deliberate distortions to achieve “results.” If the manager will pull tricks in this area, what else might he be doing that is questionable or even perhaps illegal?




Analytical Thinking (75 minutes)

1. The revised predetermined overhead rate is determined as follows:

Original estimated total manufacturing overhead... $2,475,000 Plus: Lease cost of the new machine .................... 300,000 Plus: Cost of new technician/programmer ............. 45,000 Estimated total manufacturing overhead ............... $2,820,000 Original estimated total direct labor-hours ............ 52,000 Less: Estimated reduction in direct labor-hours ..... 6,000 Estimated total direct labor-hours ......................... 46,000

Estimated total manufacturing overheadPredetetermined=overhead rate Estimated total amount of the allocation base

$2,820,000=

46,000 DLHs

=$61.30 per DLH

The revised predetermined overhead rate is higher than the original rate because the automated milling machine will increase the overhead for the year (the numerator in the rate) and will decrease the direct labor-hours (the denominator in the rate). This double-whammy effect increases the predetermined overhead rate.

2. Acquisition of the automated milling machine will increase the apparent

costs of all jobs—not just those that use the new facility. This is because the company uses a plantwide overhead rate. If there were a different overhead rate for each department, this would not happen.

3. The predetermined overhead rate is now considerably higher than it

was. This will penalize products that continue to use the same amount of direct labor-hours. Such products will now appear to be less profitable and the managers of these products will appear to be doing a poorer job. There may be pressure to increase the prices of these products even though there has in fact been no increase in their real costs.




Analytical Thinking (continued)

4. While it may have been a good idea to acquire the new equipment because of its greater capabilities, the calculations of the cost savings were in error. The original calculations implicitly assumed that overhead would decrease because of the reduction in direct labor-hours. In reality, the overhead increased because of the additional costs of the new equipment. A differential cost analysis would reveal that the automated equipment would increase total cost by about $285,000 a year if the labor reduction is only 2,000 hours.

Cost consequences of leasing the automated equipment: Increase in manufacturing overhead cost:

Lease cost of the new machine ................................. $300,000 Cost of new technician/programmer .......................... 45,000

345,000 Less: labor cost savings (2,000 hours × $30 per hour) .. 60,000 Net increase in annual costs ........................................ $285,000

Even if the entire 6,000-hour reduction in direct labor-hours occurred, that would have added only $120,000 (4,000 hours × $30 per hour) in cost savings. The net increase in annual costs would have been $165,000 and the machine would still be an unattractive proposal. The entire 6,000-hour reduction may ultimately be realized as workers retire or quit. However, this is by no means automatic.

There are two morals to this tale. First, predetermined overhead rates should not be misinterpreted as variable costs. They are not. Second, a reduction in direct labor requirements does not necessarily lead to a reduction in direct labor-hours paid. It is often very difficult to actually reduce the direct labor force and may be virtually impossible in some countries except through natural attrition.




Teamwork in Action

1. The types of transactions that are posted to the accounts may be summarized in T-account form as follows:

Raw Materials

Beginning balance Purchases Direct materials used (to Work in

Process)

Accounts Payable

Beginning balance Payments to suppliers Purchases of raw materials

Work in Process

Beginning balance Direct materials used (from Raw

Materials) Cost of goods manufactured (to

Finished Goods) Direct labor Manufacturing overhead applied


Actual manufacturing costs Manufacturing overhead applied Overhead overapplied (to COGS) Overhead underapplied (to COGS)

Finished Goods

Beginning balance Cost of goods manufactured (from

WIP) Cost of goods sold

Cost of Goods Sold

Cost of goods sold Overhead underapplied (from

Manufacturing Overhead) Overhead overapplied (from

Manufacturing Overhead)




Teamwork in Action (continued)

2. The predetermined overhead rate and overhead applied amounts are: Predetermined overhead rate: $180,000 ÷ 60,000 DLHs = $3 per DLH. Overhead applied: 5,200 DLHs × $3 per DLH = $15,600 3. The balance in the work in process account is determined as follows:

Direct materials (given) ................................... $2,600 Direct labor (300 DLHs × $6 per DLH) .............. 1,800 Overhead applied (300 DLHs × $3 per DLH) ..... 900 Total .............................................................. $5,300

4. The completed T-accounts follow:

Accounts Payable

(c) Payments 40,000 (c) Balance 4/1 6,000 (plug) Purchases 42,000

(given) Balance 4/30 8,000

Work in Process

(given) Balance 4/1 4,500 (f) Cost of goods manufactured

89,000

(b,d) Direct labor* 31,200 (above) Overhead applied 15,600 (plug) Direct materials 43,000

(above) Balance 4/30 5,300

* 5,200 DLHs × $6 per DLH = $31,200 Raw Materials

(given) Balance 4/1 12,000 (above) Direct materials 43,000 (above) Purchases 42,000

Balance 4/30 11,000




Teamwork in Action (continued)


(given) Actual costs for April

14,800 (above) Overhead applied

15,600

To cost of goods sold

800 Overapplied overhead

800

Finished Goods

(e) Balance 4/1 11,000 (plug) Cost of goods sold

84,000

(f) Cost of goods manufactured

89,000

(given) Balance 4/30 16,000 Cost of Goods Sold

(above) Cost of goods sold

84,000 (above) Overapplied overhead

800

83,200




Communicating in Practice

Date: Current date To: Instructor From: Student’s Name Subject: Talk with a Controller

The student’s memorandum should address the following: The name, title and job affiliation of the individual interviewed. (Note:

Not specifically required in problem but essential and, as such, a good topic for class discussion, if appropriate.)

A list of the company’s main products. Identification of the type of costing system in use (job-order, process or

other). Brief description of how overhead is assigned to products (including

basis for allocation and whether more than one overhead rate is in use). Indication as to whether any changes have been made to or are being

considered in relation to the company’s costing system, and, if applicable, a brief description of the changes.




Research and Application

1. Toll Brothers succeeds first and foremost because of its product leadership customer value proposition. The annual report mentions in numerous places that Toll Brothers focuses on Luxury Homes and Communities and high-quality construction. Page 8 of the 10-K says ‘We believe our marketing strategy, which emphasizes our more expensive “Estate” and “Executive” lines of homes, has enhanced our reputation as a builder-developer of high-quality upscale housing.” Page 2 of the 10-K says “We are the only publicly traded national home builder to have won all three of the industry’s highest honors: America’s Best Builder (1996), the National Housing Quality Award (1995), and Builder of the Year (1988).” Toll Brothers seeks to realize manufacturing efficiencies for the benefit of its shareholders, but its customers choose Toll Brothers for its leadership position in the luxury home market.

2. Toll Brothers faces numerous business risks as described in pages 10-11

of the 10-K. Students may mention other risks beyond those specifically mentioned in the 10-K. Here are four risks faced by Toll Brothers with suggested control activities:

Risk: Downturns in the real estate market could adversely impact Toll Brothers’ sales. Control activities: Diversify geographic markets served so that a downturn in one region of the country will not cripple the company.

Risk: Large sums of money may be spent buying land that, geologically speaking, cannot support home construction. For example, soil conditions may be too unstable to support the weight of a home. Control activities: Pay engineers to certify that targeted properties can support home construction.

Risk: Raw material costs may increase thereby depressing profit margins. Control activities: Vertically integrate by operating manufacturing facilities (see page 12 of the 10-K for a discussion of Toll Brothers’ manufacturing facilities). Buying raw materials at wholesale prices cuts out a middleman in the value chain. In addition, Toll Brothers can purchase raw materials in large volumes to realize purchase price discounts.




Research and Application (continued)

Risk: Subcontractors may perform substandard work resulting in warranty claims and dissatisfied customers. Control activities: Employ a project manager within each community who serves in a quality assurance capacity.

3. Toll Brothers would use job-order costing because its homes are unique

rather than homogeneous. Each home being built would be a considered a job. Toll Brothers’ standard floor plans differ from one another particularly across its main product lines such as Move-Up, Empty Nester, Active Adult, Urban In-Fill, High-Density Suburban, and Second Homes (see pages 5 and 9 of the annual report). In 2004, Toll Brothers introduced 87 new home models (see page 4 of the 10-K).

Beyond the fact that Toll Brothers offers a wide variety of floor plans, homes are further distinguished from one another by customer upgrades that add an average of $103,000 to the price of a home (see page 1 of the annual report). Upgrades include items such as additional garages, guest suites, extra fireplaces, and finished lofts (see page 4 of 10-K).

4. Examples of direct materials used in Toll Brothers’ manufacturing

facilities include lumber and plywood for wall panels, roofs, and floor trusses, as well as other items such as windows and doors (see page 12 of the 10-K). Examples of direct materials used at the home sites include shingles, exterior finishes such as stone, stucco, siding, or brick, kitchen cabinets, cement for the foundation, bathroom fixtures, etc.

The standard bill of materials (e.g., prior to considering a specific customer’s upgrade requests) for each home would differ. For example, differences in the square footage of homes would drive numerous differences in their bills of materials. Bigger homes would require more lumber, sheetrock, electrical wiring, etc. Bills of materials are also likely to differ across geographic regions of the country. For example, homes in Florida typically do not have basements whereas homes in New England are likely to have basements. Front porches may be more prevalent in South Carolina than in Ohio. Different grades of windows and insulation may be used in homes in the North than in the South.





5. Toll Brothers incurs two types of direct labor costs. The company employs its own direct laborers in its manufacturing facilities in Morrisville, Pa. and Emporia, Va. The costs of these workers can be traced to specific items such as roof trusses that can in turn be traced to particular houses. Work at the home sites is performed by subcontractors. The labor cost embedded in a subcontractor’s fixed price contract is directly traceable to the home being built. However, the direct laborers are not employed by Toll Brothers. Toll Brothers would not use employee time tickets at its home sites because the subcontractors are not employees of Toll Brothers, Inc. and they are paid a fixed price that is unaffected by the amount of hours worked.

6. There are numerous examples of overhead costs mentioned in the annual report and 10-K. Some examples are: land acquisition costs, land development costs (e.g., grading and clearing), road construction costs, underground utility installation costs, swimming pools, golf courses, tennis courts, marinas, community entrances, model home costs (including construction, furnishing and staffing), and project manager salaries. These costs are incurred to create housing communities but they cannot be easily and conveniently traced to specific homes.

7. It appears that Toll Brothers does not use cost-plus pricing to establish

selling prices for its base models. Page 8 of the 10-K says “In determining the prices for our homes, we utilize, in addition to management’s extensive experience, an internally developed value analysis program that compares our homes with homes offered by other builders in each local marketing area.” In other words, the value to the customer and competitive conditions determine prices—not the cost of building a particular home.

Page 5 of the annual report says “When there is strong demand, we benefit from exceptional pricing power because we have greater ability to raise prices than those builders who target buyers on tight budgets: it’s easier to hit doubles, triples and home runs selling to luxury buyers.” This quote implies that pricing is driven by the customers’ willingness and ability to pay and not by the cost of building a particular house.





8. Based on information contained in the 10-K, it appears that Toll Brothers assigns overhead to cost objects in two ways. First, page 16 of the 10-K says “Land, land development and related costs (both incurred and estimated to be incurred in the future) are amortized to the cost of homes closed based upon the total number of homes to be constructed in each community.” In other words, each home is assigned an equal share of overhead costs. Page 16 also says, “The estimated land, common area development and related costs of master planned communities (including the cost of golf courses, net of their estimated residual value) are allocated to individual communities within a master planned community on a relative sales value basis.” In other words, higher priced communities within a master planned community are assigned a greater portion of master planned community overhead costs.

In master planned communities, the allocation of overhead appears to take place in two stages. First, the overhead costs common to all communities contained with the master planned community are assigned to communities based on relative sales value. Then, all overhead costs related to a particular community within the master planned community are assigned equally to each home site.

The company needs to assign overhead costs to homes so that it can derive a cost of sales number for the income statement and an inventory number for the balance sheet. Page 29 of the annual report shows the components of the company’s ending inventory balance of $3.878 billion. Inventoriable costs include land and land development costs ($1.242 billion), construction in progress ($2.178 billion), sample homes and sales offices ($208 million), land deposits and costs of future development ($237 million), and other ($12 million). Construction in progress is similar to work in process for a manufacturing company. Overhead costs (as well as direct costs) flow through the construction in progress account and hit cost of home sales when a customer has a closing and takes possession of the home.

chapter 2 and (2) how many units are still in inven-tory at the end of a period and the cost of...

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